1.

The ethical responsibility requiring that a person persons should possess professional competence
and exercise due care is met by a full and thorough understanding of the fields of business and finance.

3. The concept of materiality would be least important to an auditor in determining transactions that
should be reviewed.

2. Sufficiency of evidential matter refers to the quantity the evidence gathered.

4. The risk of material misstatement of the financial statements is generally lesser when account
balances and classes of transactions include accounting estimates rather than essentially factual data.

5. The auditor's judgment ultimately determines the specific procedures necessary to provide an
independent auditor with a reasonable basis for the expression of an opinion.

6. "Unrestricted access to whatever record, documentation and other information requested in

connection with the audit" is usually one of the items documented in an audit engagement letter.

7. In the case of recurring audits, the auditor need not send a new engagement letter, except in certain
circumstances.

8. If justifiable, terms of the new engagement must be agreed with the client, and the auditor will issue
a report based on the new engagement.

9. If the engagement is revised from an audit to a review, the review report should not mention the
original engagement.

10. Regarding communications between auditors, the predecessor auditor has the duty to initiate
communications with the successor auditor.

11. Planning means developing a general audit plan and a detailed audit strategy for the expected
nature, timing and extent of the audit.

12. The primary objective of an auditor to study and evaluate existing internal control is to obtain a basis
for the expression of an auditor's opinion.

13. One of the areas covered by PSAs is that the report shall state whether the financial statements are
presented in accordance with generally accepted accounting principles.

14. Absolute certainty in auditing is rarely attainable because much of the evidence available to the
auditor is persuasive rather than conclusive in nature.

15. The engagement partner is responsible for debriefing process.

E7-2 Multiple Choice.

1. The independent auditor is most concerned with which of the following:

A. Accuracy and reliability of accounting data.

B. Promotion of operational efficiency.

C. Adherence to prescribed managerial policies.

D. Attainment of the organization's objectives.

2. Auditing standards differ from auditing procedures in that procedures relate to:

A. Measures of performance.

B. Audit principles.

C. Acts to be performed.

D. Audit judgments.

3. One of the following refers to an ethical responsibility of the auditor:

A. Confirm the cash balances

B. Exercise due professional care

C. Join professional society

D. Destroy confidential relationship with client.

4. The ethical requirement of "professional competence and due care" should mean that a CPA who
accepts an engagement has a duty to perform:

A. As a professional possessed with the degree of skills customarily held by others in the profession.

B. With necessary diligence and without fault or error.

C. As a professional who will assume responsibility for damages caused by his error of judgment.

D. To the satisfaction of the audit committee and third parties who may rely upon his result.

5. Which of the following is mandatory if the auditor is to comply with Philippine Standards on Auditing?

A. Possession by the auditor of adequate technical training.

B. Use of analytical procedures in audit engagements.

C. Use of statistical sampling whenever feasible on an audit engagements

D. Confirmation by the auditor of material accounts receivable balances.

6. Which of the following best describes why publicly traded corporations follow the practice of having
the outside auditor appointed by the board of directors or elected by the stockholders?

A. To comply with the regulations of the FRSC B. To encourage a policy of rotation of the independent
auditors

C. To emphasize auditor independence from the management of the corporation.

D. To provide the corporate owners with an opportunity to voice their opinion concerning the quality of
the auditing firm selected by the directors.

7. Before accepting an audit engagement, a successor auditor should make specific inquiries of the
predecessor auditor regarding:

A. Disagreements which the predecessor had with the client concerning auditing procedures and
accounting principles.

B. The predecessor's evaluation of matters of continuing accounting significance.

C. The degree of cooperation the predecessor received concerning the inquiry of the client's legal
counsel.

D The predecessor's assessments of inherent risk and judgments about materiality.

8. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the
predecessor auditor should:

A. Keep silent of the denial.

B. Disclose the fact that the permission to disclose is denied by the client.

C. Disclose adequately to proposed auditor all noncompliance made by the client.

D. Seek legal advice before responding to the proposed auditor.

9. The primary purpose of the engagement letter is to:

A. Remind management that the primary responsibility for financial statements rests with management.

B. Provide a written record of the agreement with the client as to the services to be provided.

C. Provide a starting point for the auditor's preparation preliminary audit program.

D. Satisfy the requirements of the CPA's liability insurance policy.

10. Which of the following is least likely to be included in an audit engagement letter?

A. Identification of specific audit procedures that the auditor needs to undertake.

B. Description of any letters or reports that the auditor expects to submit to the client.

C. A reference to the inherent limitations of an audit that there is an unavoidable risk that some material
misstatements may remain undiscovered.

D. Basis on which fees are arrangements. computed and any billing

11. If a change in the type of engagement from higher of assurance is not justified, the auditor should:

A. Qualify the report on the original engagement.

B. Continue with the revised engagement, but make explicit reference about the original
engagement.
C. Refuse to agree to management's request on the change of engagement and continue with the
original engagement.
D. Withdraw from the engagement.

12. This refers to the development of a general strategy and a detailed approach for the expected
nature, timing and extent of audit:

A. Supervision

B. Direction

C. Audit planning

D. Pre-engagement

13. An auditor obtains knowledge about a new client's business and its industry to

A. Make constructive suggestions concerning improvements to the client's internal control. B. Develop
an attitude of professional skepticism concerning management's financial statement assertions.

C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a
whole to be materially misstated. D.Understand the events and transactions that may have an effect on
the client's financial statements.

14. If it is probable that the judgment of a reasonable person would have been changed or influenced by
the omission or misstatement of information, then that information is:

A. Significant

B. Insignificant

C. Material

D. Relevant

15. Religious Corp. has a few large accounts receivable that total P1,000,000. Pilgrim Corp. has a large
number of small accounts receivable that also total P1,000,000. The importance of an error in any one
account is, therefore, greater for Religious Corp. than for Pilgrim Corp. This is an example of the
auditor's concept of:
A. Materiality.

C. Reasonable assurance.

D. Relative risk.

B. Comparative analysis

16. Which of the following statements is not correct about materiality?

A. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.

B. An auditor considers materiality for planning purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the financial statements.

C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both
quantitative and qualitative judgments.

D. An auditor's consideration of materiality in influenced by the auditor's perception of the needs of a

reasonable person who will rely on the financial statements.

17. Which of the following relatively small misstatements most likely could have a material effect on an
entity's financial statements?

A. An illegal payment to a foreign official that was not recorded.

B. A piece of obsolete office equipment that was not retired.

C. A petty cash fund disbursement that was not properly authorized.

D. An uncollectible account receivable that was not written off.

18. The concept of materiality would be least important to an auditor in determining the

A. Transactions that should be reviewed.

B. Need for disclosure of a particular fact or transaction.

C. Scope of the CPA's audit program relating to various accounts

D. Effects of direct financial interest in the client upon the CPA's independence.

19. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit
function. An effective auditor will:
A. Take any means available to reduce the risk to the lowest possible level.

B. Set the risk level between 5% and 10%.

C. Perform the audit procedures first and quantitatively set the risk level before forming an opinion and
writing the report.

D. Recognize that risks exist and deal with them in an appropriate manner.

20. The risk of a material misstatement occurring in an account, assuming an absence of internal control,
is referred to as:

A. Audit risk

B. Inherent risk

C. Control Risk

D. Detection risk

21. The risk that a misstatement that could occur in an account balance or class of transactions and that
could be material individually or in the aggregate, will not be prevented or detected and corrected on a
timely basis by the accounting and internal control systems:

A. Audit risk

B. Inherent risk

C. Control risk

D. Detection risk

22. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

A. Elements of audit risk while detection risk is not.

B. Changed at the auditor's discretion while detection risk is not.

C. Considered at the individual account-balance level while detection risk is not.

D. Functions of the client and its environment while detection risk is not.

23. The risk that an auditor's procedures will lead to the conclusion that a material error does not exist
in an account balance when in fact, such error does exist is referred to as

A. Audit risk
B. Inherent risk

C. Control risk

D. Detection risk

24. An auditor should design the written audit program so that

A. All material transactions will be selected for testing.

B. Substantive tests prior to the balance sheet date will be minimized.

C. The audit procedures selected will achieve specific audit objectives.

D. Each account balance will be tested under either tests of controls or tests of transactions.

25. The primary purpose of the auditor's consideration of internal control is to provide a basis for –

A. Determining whether procedures and records that are concerned with the safeguarding of assets are
reliable.

B. Constructive suggestions to clients concerning deficiencies in internal control.

C. Determining the nature, timing and extent of audit tests to be applied.

D. The expression of an opinion.

26. Tests of controls are used to test whether controls are:

A. Operating effectively.

B. Placed in operation or implemented.

C. Properly incorporated in the financial statements.

D. Properly documented by the client.

27. The major reason an independent auditor gathers audit evidence is

A. To form an opinion o the financial statements.

B. To detect fraud.

C. To evaluate management.

D. To evaluate internal control.

28. Which statement is incorrectregarding the suffistatements appropriateness of audit evidence?

A. Sufficiency and appropriateness are inter-related.

B. Sufficiency is the measure of the quantity of audit eevidence

C. Appropriateness is the measure of the quality of audit evidence.

D. Merely obtaining more audit evidence may compensate for its poor quality.

29. Which of the following descriptions refer to substantive tests?

A. Obtain an understanding of the entity and its environment,including its internal control

B. Test the operating effectiveness of controls. C. Detect material misstatements at the assertion level.

D. None of these

30. When a company's financial statements bear an unqualified opinion, readers of the audit report can
assume that:

A. The external auditor found no fraud.

B. The company is financial sound and the financial statements are accurate.

C. Internal control is effective.

D. All material disagreements between the company and external auditor about the application of
accounting principles were resolved in the satisfaction of the external auditor.

E8-1 True or False.

1. Planning does not assist in proper assignment of work to assistants; but it facilitates the coordination
of work done by other auditors and experts.

2. The extent of planning will vary according to the size of the entity, the complexity of the audit, the
type of opinion to be expressed and the auditor's assessment of the client's ability to pay the audit fee.

3. The auditor's understanding of the entity and its environment assists in the identification of events,
transactions and practices which may have a material effect on the financial statements.

4. One of the elements of the audit planning process most likely to be agreed upon with the client
before implementation of the audit strategy is the determination of the timing of inventory observation
procedures to be performed.
5. Before accepting an engagement to audit a new client, an auditor is required to make inquiries of the
predecessor auditor without need to obtain the consent of the prospective client. Clients consent could
begin

6. The objective of performing analytical procedures in planning an audit is to identify the existence of
illegal acts that went undetected because of internal control weaknesses.

7. Analytical procedures used in planning an audit should focus on detecting material misstatements at
the account balance level.

8. An auditor should design the audit to provide reasonable assurance of detecting errors and
irregularities that are material to the financial statements.

9. What is material is a matter of professional judgment. 10. An audit normally includes audit
procedures specifically designed to detect illegal acts that have an indirect but material effect on the
financial statements.

11. The senior associate most likely would have as responsibility to explain to the audit associates how
the results of the various auditing procedures should be evaluated.

12. When an auditor believes that an understanding with the client has not been established, he or she
should ordinarily decline to accept or perform the audit.

13. An auditor should design the written audit program so that all material transactions will be selected
for substantive testing.

14. The auditor program usually cannot be finalized until the consideration of the entity's internal
controls has been completed.

15. Between the auditor and client management, auditor is expected to have a lesser understanding of
the entity and its environment.

16. Substantive audit procedures are audit procedures designed to obtain an understanding of the entity
and its environment.

17. It is necessary for all team members to have a comprehensive knowledge of all aspects of the audit.

18. The industry in which the entity operates may give rise to specific risks of material misstatement
arising from the nature of the business or the degree of regulation.

19. Strategies are the overall plans for the entity, while objectives are the operational approaches by
which management intends to achieve its objectives.

20. Business risk is broader in scope than the risk of material misstatement of the financial statements.
21. The auditor does not have a responsibility to identify or assess all business risks.

22. The concept of materiality recognizes that some matters are important for fair presentation of
financial statements in conformity with GAAP, while other matters are not important.

23. Regarding materiality, both amount and nature of misstatements should be considered.
24. Higher materiality levels result to lower audit risk.

25. The lower the materiality level, the higher the amount of required evidence from substantive
procedures to compensate for increased risk.

E8-2 Multiple Choice.

1. The development of a general strategy and a detailed approach for the expected nature, timing and
extent of audit refers to:

A. Supervision

B. Direction

C. Monitoring

D. Audit planning

2. Adequate planning helps ensure that (select the exception):

A. Appropriate attention is devoted to important areas of the audit

B. Potential problems are identified

C An unqualified opinion is expressed

D.Work is completed expeditiously.

3. Which of the following is most likely to require special planning considerations related to asset
valuation?

A. Inventory is comprised of diamond rrings.

B.The client has recently purchased an expensive copy

C. machine. Assets consisting less than P250 are expensed even when life exceeds one year.

D. Accelerated depreciation methods are used for amortizing the expected the costs of factory
equipment

4. Which of the following statements is incorrect?

A. The auditor should plan the audit so that the engagement will be performed in an effective manner.

B. Planning an audit involves establishing the overall audit strategy for the engagement and developing
the audit plan, in order to increase audit risk to an unacceptably high level.
C. Planning involves the engagement partner and other key members of the engagement team to
benefit from their experience and insight and to enhance the effectiveness and efficiency of the
planning process.

D. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues until the
issuance of the auditor's report.

5. With respect to planning an audit, which of the followingst s always true?

A. It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

B. An engagement should not be accepted after the client's year-end.

C. An inventory count must be observed at year-end.

D. Final staffing decisions must be made prior to completion of the planning stage.

6. Once the overall audit strategy has been established, the auditor is able to start the development of a
more detailed audit plan to address the various matters identified in the overall audit strategy. The
extent of planning will vary according to the following:

A. Size of the audit client.

B. Auditor's experience with the entity and knowledge of the business.

C. The nature and complexity of the audit engagement.

D. All of these affect the extent of planning.

7. Which of the following is not considered by the CPA when he makes an overall audit plan?

A. The content of the representation letters.

B. The effect of information technology on the audit.

C. Identification of complex accounting areas including those involving accounting estimates.

D. The nature and timing of reports and other communication with the entity that are expected under
the engagement.

8. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit
procedures is usually the least costly to perform?

A. Analytical procedures.

B. Tests of controls.
C. Tests of balances.

D. Substantive tests of transactions.

9. This is a listing of all the things which the auditor will use to gather

sufficient appropriate audit evidence:

A. Audit procedures
B. Audit plan
C. C. Audit program
D. D. Audit risk model

10. In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the

A. Timing of audit procedures

B. Cost-benefit of gathering evidence

C. Selected audit techniques.

D. Financial statement assertions.

11. Which of the following procedures is not performed as a part of planning an audit engagement?
prior year.

A. Reviewing the working papers of the B. Performing analytical procedures.

C. Tests of controls.

D. Designing an audit program..

12. The senior auditor responsible for coordinating the field work usually schedules a pre-audit
conference with the audit team primarily to

A. Give guidance to the staff regarding both technical and personnel aspects of the audit.

B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
C. Establish the need for using the work of specialists andinternal auditors.

D. Provide an opportunity to document staff disagreements regarding technical issues.

13. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?

A. Coordinating the assistance of entity personnel in datapreparation.

B. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to
the entity.

C Selecting a sample of vendor's invoices for comparison to receiving reports.

D. Reading the current year's interim financial statements.

14. The auditor should have or obtain a knowledge of the client's business sufficient to:

A. Evaluate whether the financial statements are materially misstated.

B. Document material weaknesses in accounting and internal control systems.

C. Identify and understand events, transactions and practices that may have effect on financial
statements.

D. Have an overall evaluation of whether financial assertions are fairly presented in the financial
statements,

15. To obtain an understanding of a continuing client's business in planning an audit, an auditor most
likely would:

A. Perform tests of details of transactions and balances.

B. Review prior-year working papers and the permanent file for the client.

C. Read specialized industry journals.

D. Reevaluate client's internal control environment.

16. Which of the following procedures would an auditor most likely perform in planning an audit of
financial statements?

A. Inquiring of the client's legal counsel concerning pending litigation.

B. Comparing the financial statements to anticipated results.

C. Examining computer generated exception reports to verify the effectiveness of internal control.

D. Searching for unauthorized transactions that may aid indetecting unrecorded liabilities.

17. Analytical procedures are required:

A. As a risk assessment procedure performed during planning

B. As a substantive test procedure during evidence-gathering

C. As an overall review at audit completion

D. Both A and C."

18. Which of the following characteristics most likely would heighten an auditor's concern about the risk
of intentional manipulation of financial statements?

A. Turnover of senior accounting personnel is low.

B. Insiders recently purchased additional shares of the entity's stocks.

C.Management places substantial emphasis on meeting

D. earnings projections. The rate of change in the entity's industry is low.

19. The auditor should remain alert for evidence of events of conditions which may cast significant
doubt on the entity's ability to continue as a going concern:

A. During planning and consideration of internal controls

B. During interim audit work

C. During year-end audit work

D. All of these.

20. With respect to errors and irregularities, the auditor should plan:

A. To search for errors that would have a material effect and for irregularities that would have either
material or immaterial effect on the financial statements.

B. To search for irregularities that would have a material effect and for errors that would have either
material or immaterial effect on the financial statements. have a
C. To search for errors or irregularities that would material effect on the financial statements.

D. To discover errors or irregularities that have either material or immaterial effect on the financial
statements.

21. Throughout the course of the audit, the auditor needs to be alert for transactions which appear
unusual in the circumstances and may indicate the existence of previously unidentified relatedpa
Examples include the following, except:

A. Transactions in which substance differs from form.

B. High volume or significant transactions with certain customers or suppliers as compared with others.
C. Transactions which have normal terms of trade.

D. Unrecorded transactions, such as the receipt or provision ofma ervices at no charge.

22. In connection with the examination of financial statements, an independent auditor could be
responsible for failure to detect a material fraud if:

A. Statistical sampling techniques were not used on the audit.

B. The auditor planned the work in a hasty and inefficient manner.

C. Accountants performing important parts of the work failmanne discover a close relationship between
the treasurer and the cashier.

D. The fraud was perpetrated by one client employee, who circumvented the existing internal controls.

23. In planning an audit of a new client, an auditor most likely would consider the methods used to
process accounting information because such methods if

A. Influence the design of internal control.

B. Affect the auditor's preliminary judgment about materiality.

C. Assist in evaluating the planned audit objectives.

D. Determine the auditor's acceptable level of audit risk.

24. When setting a preliminary judgment about materiality,

A. Less evidence is required for a low peso amount than for a high peso amount.

More evidence is required for a low peso amount than for a high peso amount.
C. The same amount of evidence is required for either low or high peso amounts.

D. There is no relationship between it and the peso amount ofev eeded.

25. Which of the following statements is incorrect?

A. The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risk of material misstatement of the financial statements,
whether due to fraud or error, andsufficient to design and perform further audit procedures.

B. The auditor uses professional judgment to determine the extent of the understanding required of the
entity and its environment, including its internal control.

C. The depth of the overall understanding that is required by the auditor in performing the audit is more
than that possessed by management in managing the entity.

D. The performance of risk assessment procedures is a continuous dynamic process of gathering,

updating and analyzing information throughout the audit.

26. According to PSA 315, the following procedures are used to obtai an understanding of the entity and
its environment, except:

A. Inquiries of management.

B. Confirmation of accounts receivable.

C. Observation and inspection.

D. Analytical procedures.

27. The auditor's understanding of the entity and its environment consists an understanding of the
following aspects:

A. Industry, regulatory and other external factors, including theap inancial reporting framework

B. Nature of the entity, including the entity's selection and application of accounting policies

C. Objectives and strategies and the related business risks that may result in a material misstatement of
the financial statements

D. All of these.

28. These are the operational approaches by which management intends to achieve its objectives.

A. Strategies.
B. Planning methods.

C. Business risk approaches.

D. Operational plans.

29. In obtaining an understanding of a client's objectives, strategies and related business risks, the
auditor would most likely consider the following as business risks, except: expertise to deal

A. The entity does not have the personnel or

B. with the changes in the industry. There is increased product liability.

C. Demand has not been accurately estimated.

D. The entity relies more on equity financing rather than debt financing.

30. Select the incorrect statement:

A. Business risk is broader than the risk of materialm

B. Most business risks do not have financial consequences, though they may have an effect on the
financial statements of an entity.

C. Usually, management identifies business risks and develops approaches to address them.

D. Smaller entities often do not set their objectives and strategies, or manage the related business risks,
through formal plans or processes.